Why has CSC's contract with BAE reduced 60% in value?

There is some interesting commentary about CSC’s recent contract renewal with BAE systems.

The five-year IT outsourcing contract has a value of up to $160m per year. Service desk

The deal is pretty broad and includes:  End-user computing, mainframe management, storage, network services and application maintenance and support.

Rachael Stormonth, at outsourcing analyst firm NelsonHall, wrote an article revealing that this contract renewal sees the total contract value (TCV) drop by a massive 60%. This is a lot despite many suppliers being willing to cut prices during tough economic conditions.

The contract replaces an agreement due to expire in April 2012, and is the third contract renewal by BAE. CSC started servicing BAE Systems in April 1994, originally through a 10-year IT outsourcing contract in the UK.

This is what she wrote:

“BAE Systems is one of CSC’s key clients in the U.K. commercial sector, together with the Royal Mail group. This renewal was therefore very important for CSC U.K.

However, the value of the contract has decreased significantly from $1.9bn in the previous 5-year agreement to a maximum of $0.8bn in this new one. While one might expect reductions of up to 30% in large scale ITO contract renewals such as this, the TCV has declined by nearly 60%. Significantly, its geographical scope has reduced and no longer includes the following significant BAE Systems markets:

-The U.S. (43% of BAE revenues, with 52,000 employees in the U.S. entity). BAE initially looked to CSC to help it develop its defence sector business in the U.S.
-Australia (6,000 employees)

CSC was not available to comment this week on whether separate awards are pending in these geographies.

The original CSC/BAE Systems relationship had the hallmarks of an old-style 90s deal: monolithic and with adherence to rigid contractual terms and pricing structures. IT outsourcing contracts awarded today expect far more commercial flexibility from the service providers.

Last year, CSC renewed its IT outsourcing contract with missile manufacturer MBDA (U.K. and France) with a 4.5-year contract (~$85m NelsonHall estimated value). MBDA is jointly owned by BAE Systems (37.5%), EADS (37.5%) and Finmeccanica (25%).”

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